Pension Reform: Villaraigosa v. Riordan

LA WATCHDOG - The Riordan Plan for pension reform will be the defining issue in the City’s upcoming elections in March and May.

That is why we must demand a simple “YES” or “NO” answer from all the candidates for Mayor, Controller, City Attorney, and the City Council as to whether or not they support Mayor Riordan’s ballot measure to reform the City’s busted pension plans.

One thing is for certain. We cannot trust any promises of our Elected Elite to reform the City’s pension system, especially once they are cornered in the bowels of City Hall by the campaign funding leadership of the City’s public labor unions.

Our current pension system is an unmitigated disaster that threatens the City’s very solvency.

Since 2005 when Mayor Villaraigosa took office, the value of future benefits for the City’s two pension plans has escalated 40% to over $35 billion, an increase of $10 billion. As a result, the two plans are only 72% funded and are underfunded by $10 billion.

By 2017, pension contributions are expected to be $1.3 billion, devouring 26% of General Fund revenues, a staggering leap of almost $1 billion since 2005. And after these staggering payments, the unfunded liability is expected to increase by 30% from current levels.

This has forced the City to cut services and rely on inefficient, short term fixes to “balance” the budget: the $600 million Early Retirement Incentive Program; the dumping of over 2,000 surplus City employees on DWP, LAX, and the Port; the deferral of earned civilian raises until January of 2014; the banking of police overtime; the failure to maintain and repair our streets and sidewalks; and the gaming of the assumptions underlying the calculation of the City’s annual contribution to the pension plans.

As a result of the crying need for pension reform, the City Council recently approved Mayor Villaraigosa’s Retirement Security Plan for new civilian employees, despite vehement protests by the City’s public sector unions.

But the establishment of a new tier of defined benefits for the Los Angeles Employees’ Retirement System only impacts new civilian employees and is projected to save the City only $15 million a year by 2017, nickels and dimes compared to the City’s projected pension contribution of $1.3 billion.

On the other hand, the Riordan Plan will save the City “hundreds of millions of dollars every year by 2017 and upwards of a billion dollars by 2020” according to quotes in The Los Angeles Times.

Importantly, these savings need to be verified.

The Riordan Plan is more comprehensive. It applies not only to new civilian employees, but to ALL new City employees, including those hired by the Police and Fire Departments and the Department of Water and Power.

The Riordan Plan also establishes a defined contribution plan for all new City employees, where the City’s contribution will not exceed 10% of salary for civilian employees and 12.5% for the sworn employees such as the police and firefighters.

While these proposed contributions will result in lower levels of expense for the City, new civilian workers who have 30 years of service, contribute a matched 10% of their salary to the defined contribution plan, and earn 5% on their investments will have a nest egg of about $1,000,000 to fund their retirement.

If the investment rate of return is 7.75%, the nest egg grows to almost $1.6 million.

The retirement package for sworn employees who have 30 years of service, contribute a matched 12.5% of their salary, and earn 5% on their investments will amass to $1.7 million.

If the investment rate of return is 7.75%, the bonanza surges to $2.7 million.

(Note: These back of the envelope estimates will need to be analyzed for accuracy.)

Current City employees, including civilian, sworn, and DWP, will be required to contribute an amount equal to the City’s actual cost for the pension and retiree healthcare, subject to certain limitations. The Riordan Plan also eliminates “spiking” and limits increases in “pensionable” compensation if the City’s cost exceeds 15% of payroll for civilian and DWP workers and 25% for the sworn employees.

One of the major sources of controversy are the Transition Costs associated with the financing of the unfunded pension liability of a defined benefit plan if a new tier or plan is established, as is the case with both the Villaraigosa and Riordan Plans.

However, the Riordan Plan anticipated this issue by permitting the City to continue to amortize its unfunded pension liabilities by allowing the closed defined benefit plans to use its existing “level percent of payroll” methodology over all employees, including those in the new defined contribution plan, not just the remaining employees covered by the defined benefit plan. .

Interestingly, Eric Garcetti, a candidate for Mayor and one of the principal architects of the City’s financial difficulties, announced that he opposed Riordan’s plan, most likely because of his reliance on assumptions that accelerate payments to amortize the unfunded pension liabilities that are contrary to the proposed charter amendment.

Over the next 18 weeks, we will have the opportunity to review, analyze, and compare the financial impact on the City’s General Fund of both the Villaraigosa and Riordan Plans.

This information will help all Angelenos make a reasoned decision, especially given that we will be bombarded by advertisements opposing the Riordan Plan, not unlike the barrage of advertisements that oppose Proposition 32 (Paycheck Protection).

But based on current information, Riordan’s defined contribution plan appears to be far superior to the Villaraigosa Plan because it eliminates the investment risk of a defined benefit plan, is easier to administer, and applies to all new City employees. The Riordan Plan also requires increased payments by existing employees based on the value of the benefits, eliminates “spiking,” and limits increases in pension payments if the City’s contributions exceed reasonably defined limits.

The major drawback is that the campaign funding union leadership is adamantly opposed to any changes in our current pension system that is breaking the City.

So the question remains for the all candidates for public office: Are you for or against Mayor Riordan’s Plan to reform our busted pension system?(Jack Humphreville writes LA Watchdog for CityWatch He is the President of the DWP Advocacy Committee and the Ratepayer Advocate for the Greater Wilshire Neighborhood Council. Humphreville is the publisher of the Recycler -- www.recycler.com. He can be reached at: lajack@gmail.com) –cw